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Westminster Hall
Tuesday 28 February 2006
[Mrs. Joan Humble in the Chair]
Business Rates
Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Dhanda.]
9.30 am
Steve Webb (Northavon) (LD): Good morning, Mrs. Humble. I am delighted that my debate has excited the attention of the House. The allocation of business rates revenue is important to my constituents and many others.
The current local government finance structure does not fully recognise or reward local authorities' contribution to economic growth.
"Local authorities bear many of the costs of economic development although they do not benefit from the increased revenues it generates. Since 1990 business rate revenues have been paid into a central pool so that local authorities get no direct individual or local benefit."
Those well chosen words are not mine, but those of the right hon. Member for Greenwich and Woolwich (Mr. Raynsford), the previous but several local government Minister—and how right he was.
The serious issue that I want to raise is about what happens to the taxes that businesses in our constituencies pay. The key point is that since 1990, business rates have been set nationally; they are now known not as business rates, but national non-domestic rates. The money paid by local businesses, although collected locally, is passed straight to central Government and reallocated, not according to where it came from, but loosely on a per capita basis. I shall come back to that point in a moment.
Why am I—apparently uniquely—interested in that? It is because in South Gloucestershire, the unitary authority where my constituency falls, something strange has been going on since 1997. In that year—the year I was first elected—businesses in my constituency paid just under £45 million in business rates, but we in South Gloucestershire received £53 million. So in 1997–98, we were net beneficiaries by £8 million of the business rate system; those figures come from a written answer provided to me by the Department concerned. It has all gone wrong since then, because in every succeeding year we have put more into the national pot than we have taken out. In 1998–99, there was an immediate swing: local businesses paid nearly £60 million, but received only just over £55 million. There was, as it were, a £4 million tax on South Gloucestershire businesses—money that they paid in tax that did not benefit the local community.
Time would permit me to go through each succeeding year, but I shall not. Suffice it to say that in each and every year since then there has been a substantial South Gloucestershire tax—a levy on our businesses, money that did not return to the local area. I am delighted to see that my constituency neighbour, the hon. Member for Stroud (Mr. Drew), has joined us; he will want to make a lengthy contribution to the debate. The extent to which South Gloucestershire businesses overpay business
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rates—that is, pay money that does not benefit South Gloucestershire—has knock-on effects on the area of Gloucestershire that he covers.
So the tax was £4 million in 1998. Things got very bad in 2001–02, when the tax became £14 million. In this place, we toss figures such as £14 million around as though they were spare change, but in the context of the budget of a local authority which, as I shall say repeatedly, is one of the worst funded in the country for other elements of local authority funding, £14 million is a huge sum.
I am not making a party political point; the council is run in a joint administration by all three political parties. This year, the all-party council signed up to a budget that involved getting rid of travel tokens for disabled people, which had been in place for a long time. That has been controversial locally, but it is the kind of difficult choice forced on that local authority because of its very tight financial position. Those business rates that we do not get back really matter.
In the most recent year for which figures are available—the current year—it is estimated that £11 million more is paid by local businesses than is received from the national pot. The issue is a running sore. Cumulatively—I am sure you were wondering what the cumulative figure was, Mrs. Humble—£53 million more has been taken from South Gloucestershire businesses than was given back to South Gloucestershire people since the Government came to power. To give an idea of the scale, that is more money than was stolen in the Bank of England heist—it is that kind of rip-off. That huge amount of money goes out of the local community and does not come back.
I have been doing a bit of investigation to try to work out why that has been. What has caused that switch around? One of my local councillors—Councillor Dave Hockey—raised the issue with me. He said, "Did you realise that all this money is going out of the area on business rates?" I said that he was not right, because I had asked a question in Parliament and found that, surprisingly enough, we were net recipients. I had asked the question four or five years previously. The first time I asked, we had been net recipients. I thought that surprising, because we had low unemployment and lots of business; one would have imagined that we would not have been. I just left the issue alone. It was through the assiduousness of one of my councillors, who said, "Go and have another look", that I realised how much things had changed.
Why have they changed? Back in 1997–98, local businesses were paying £45 million in business rates. This year, they are paying double that—£93 million. That is strange, because official Government policy is that business rates do not go up by more than inflation each year. In a sense, the answer to that is obvious when one thinks about it. However, on the face of it, business rate increases each year, in terms of the rate poundage, are capped by retail price inflation. How can it be that businesses are paying double over a period of just eight or nine years?
Two things are going on. First, I think I am right in saying that business rate revaluation happens every five years, so we are probably on our second revaluation over the period. In a growing area where business land is in short supply, rates have gone up substantially. However, I am still astonished that the burden has
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doubled, because the revenue that we have got back has gone up by only 60 per cent. That is the root of the problem; the bill has more than doubled.
Not only South Gloucestershire is involved, although it is particularly affected by the phenomenon; other parts of the country are also affected. Across the country as a whole, Greater London is the only standard region that pays more than it receives. That will not surprise the House unduly. It is not the whole of Greater London—outer London is a net recipient—but inner London, and the particular cases of the City of London and Westminster. I am reliably informed that Westminster pays more in business rates than the whole of Birmingham, Manchester and Liverpool put together, so there are clearly very big imbalances. I pre-empt any criticism that I might end up with some very simplistic recommendation by saying that simply arguing that we should retain business rates locally is not of itself a sufficient response, because there are very big imbalances. I accept that point.
I feel in a slightly Bob Geldof mood this morning. I do not mean exactly, "Give us your money", but "At least give us our money", or "Give us some of our money"—that would be a start. I am a very modest man. I do not say, "Give us your money", but "Give us some of our money." That would be nice.
Mr. David Drew (Stroud) (Lab/Co-op): I thank my near neighbour for giving way and I am sorry that I missed the first minute of what he said. My only disagreement—the hon. Gentleman has not come on to this—is that it is not the district's money. The money should be restituted to where it comes from, which is the immediate area. I have always believed—to be fair, the Government considered this issue in their review of business rates—that at least part of the money should go back to the relevant parish or town, where there are representative bodies. Where I live, in Stonehouse, there is the bulk of the industry. It is a running sore that we put all the value into the local economy, but get nothing out of it. Does the hon. Gentleman agree? He is a new localist, surely.
Steve Webb : I am grateful for that comment. Obviously, the issue does not arise in quite the same way. South Gloucestershire is a unitary authority, so there is not the same issue between county and district as in the hon. Gentleman's area. However, there is an issue about towns and parishes, and if the Government are willing to address the point about locally raised money being spent locally, there might well be an argument for going further, to the towns and parishes. That is an interesting point.
As I say, not only South Gloucestershire is involved, but the City of London, Westminster and other parts of inner London. How does the system work at the moment? Since 1990–91, central Government have set the rate, which applies to the local tax base—the rateable value of non-domestic properties. The money is sent centrally and allocated per capita—although that is something of a simplification, as is everything in local government finance, given that there are issues about multi-tier authorities, police authorities and so on. Broadly speaking, the money returns per capita and not according to where the business activity is.
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Someone who is concerned about social justice, such as myself, might say, "Why are you moaning? Is business not a good thing? Jobs are good news. You should be glad that you have the jobs. Stop complaining and talk about something else." However, it is not that simple. Although I welcome the fact that unemployment in my constituency is below the national average and that we have had prosperity—they are obviously good things—businesses and rapid economic growth bring costs as well as benefits. Today, I am asking for the system more accurately to reflect the costs of growth and not simply its benefits.
What are the costs? One of the constant headaches in our area is the lack of infrastructure. I always think that my constituency is the nicest place in the country in which to live. The quality of life, the environment and so on are some of the things that make that the case. Judging by letters that I receive and people's complaints, the traffic congestion, the difficulty of getting affordable housing and other such issues sometimes make it not the nicest place in which to live. All those matters are exacerbated by rapid economic growth. In a sense, steady economic growth is far more manageable, but that is not what has taken place in South Gloucestershire. There has been rapid growth, thousands of new houses have been built and the infrastructure has not kept up. Had the business rates money been retained locally to a greater extent we could have done much more to accommodate the growth.
Let us consider traffic congestion. Each time another business park is built there are huge traffic implications: major highways works and so on. The roads network simply cannot expand fast enough; nor indeed should it. Dealing effectively with traffic congestion has been a huge ongoing issue. There is an area known locally as the north fringe of Bristol—that winds up the people of South Gloucestershire greatly, because it is in South Gloucestershire, although we all know where we are talking about. It has a lot of employment and it will have thousands more houses because of the Deputy Prime Minister's intervention. It has gridlock at certain times of day. When the council tries to reroute anything or change the phasing of the traffic lights, it often makes matters worse. Such things cannot be fixed on the cheap. Dealing with the highways infrastructure and the consequences of business growth is a long-term job that requires serious investment. If more of the business rates were retained locally, there would be a better match between the additional jobs, the revenue that comes from those rates and the costs that follow.
Mr. Eric Pickles (Brentwood and Ongar) (Con): I am enjoying the hon. Gentleman's analysis, but I am unclear whether he is talking about retaining locally a greater proportion of the business rate—a specified sum in respect of growth—or the whole of the business rate. The Government's scheme redistributes it around the country. If it is not redistributed, certain parts will never have sufficient funds to deal with their economic needs. How would he address those things?
Steve Webb : I am grateful for the hon. Gentleman's intervention. I tend to look upon my speeches as the equivalent of a thriller novel: they build gradually to the exciting denouement. He might be the sort of person who turns straight to the back page to find out
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whodunnit. If he bears with me, I will address his point, although I will give him a teaser in respect of my conclusion so as not to keep him in suspense too much.
Essentially there should be wholesale local retention of business rates but with some sort of equalisation mechanism to offset the extremes that would result. The consequences would be a substantial rebalancing of funding, which is currently far too centralised, but with local discretion at the margins. That is what I would like, but I will return to the point in more detail later.
Infrastructure costs result from rapid business growth. Planning is perhaps a neglected topic, in the sense that every council has a planning department. South Gloucestershire's planning department assesses major projects such as highways schemes and business park developments. It deals not just with Mrs. Jones's home extension but with things that have knock-on effects for the whole area, the local plan and the entire strategy. That is a big job. The planning department has, at times, been completely swamped by large applications. The process needs to be resourced properly. Clearly, as there is a lot of industry and business in the area, there are big issues about waste disposal and other environmental concerns.
There are also big knock-on effects on public transport. Clearly, and quite properly, we cannot just build our way out of the roads problem by constructing yet more roads, as to do so would change the character of the area. It is far better to give people realistic alternatives. Public transport is grossly underfunded in South Gloucestershire. The authority has no natural centre; the centre is outside the authority, in Bristol. People travel into Bristol but they do so by travelling across the authority. They travel to the north fringe of Bristol—the south fringe of South Gloucestershire. The situation does not lend itself to cheap public transport. It is not as if everyone lives on the outskirts of the big city and goes in to work, and all we need is a series of bus routes in and out. A much more messy set of public transport arrangements are needed, involving arterial and cross-country routes.
There are also many people living in relatively small towns and villages, and many of the public transport services are simply uneconomical. The provision of one commuter bus in the morning and one in the evening for people who live in a small village might be all that is economical. Yet, a bus service cannot be run on that basis.
Substantial knock-on effects are involved. South Gloucestershire has an extremely high level of car ownership, so more businesses and jobs mean either massive congestion or serious investment in public transport. We have not really received that investment. Retaining the business rates would enable South Gloucestershire to do more work in that area.
I want to mention one further cost, which is not an obvious one despite its importance: the cost of housing. One might imagine that lots of businesses, jobs and growth would mean lots of people with lots of money who could afford to buy their new Barratt homes on the big new estates. One might imagine that there is no problem. However, what happens is that people move into the area because of the jobs and buy up the houses, because they can afford to do so. That has consequences for the local sons and daughters, for local families and
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for people in rented accommodation. There is a dearth of rented accommodation, because owner-occupation is high, partly because of the jobs and the prosperity. Affordable housing is also in short supply, because the buying power of the people moving in for the jobs is substantial.
How does the council meet the housing need of the people who are not part of the process that I am discussing? How does it ensure that sons and daughters can afford to get a foot on the housing ladder? Surprisingly, for a prosperous area such as the one I represent, one of the biggest issues that people come to see me about every week is the lack of affordable housing to rent or to buy. That would not be obvious to an outsider. It would be easy to think that lots of jobs mean that people can afford houses and that there is no problem. However, housing is one of our biggest problems. Were we able to retain more business rates locally, the council, in partnership with housing associations or whoever, would be able to do more to ensure a better supply of affordable housing in the area. The jobs and so on are not unalloyed good news.
There is a sting in the tail. The other thing that people say is, "You get all these jobs and people moving in, so the council must be rolling in it." When a new house is built the people who move in pay council tax. However, let us consider what the funding formula does. It examines how much can be raised in council tax from all the houses and how short that amount is of what is needed, and it is involved in filling the gap. In other words, every extra house and extra bit of council tax comes off what the Government make available to the local authority in the other bit of the funding formula. Each extra person and extra house does not benefit the council at all; the money comes off what the Government give in the revenue support grant or in the formula spending assessment.
It gets worse. People then say, "Hang on a minute. The Government give you back money for every child in your schools and for every elderly person using your social services." However, when one examines the league tables, one sees that South Gloucestershire is ranked either second or third from bottom in the entire country for the amount of money per pupil in its schools, the amount of money for elderly people needing social care and so on. It is the infamous triple whammy.
Businesses come into the area, but there is a proportion of the authority's money that we never see. The council tax revenue is simply knocked off what the Government give, so we do not see that. The cost of educating each new child and looking after all elderly people is greater than the money that central Government give to pay for education and care. We make a loss on each person who moves into South Gloucestershire. It is an indisputable fact that population growth is a loss-making activity there. The argument of, "Jobs are great. You are a prosperous area. Tough—go and whinge somewhere else", does not stack up. Things are much more complicated than that. That is why there is a strong case, particularly in South Gloucestershire, for greater retention of local business rates.
Let us consider the Government's thinking and what consultation they have carried out. Obviously, they undertook their own balance-of-funding review. The issue was critical. It was about how much of the council
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tax that is raised locally was spent locally. At the moment, to put it crudely, it is about a quarter. To put it roughly, business rates amount to a fifth to a quarter of council spending on average. If we were to relocalise business rates, instead of raising locally a quarter of what is spent locally, the amount would be about a half. I consider, as the Minister probably does, that raising locally only a fifth to a quarter of the money that is spent locally is the wrong balance to strike.
The Government do not set up a balance-of-funding review if they do not sense that the balance has swung too far and that there is too much central control and not enough local discretion. Clearly, we are talking about a continuum and there is no exact right figure, but relocalising business rates could lead to a fairer, more equitable balance of funding—half local, half national.
The House will not be astonished to learn that, when the review consulted, almost all local authorities wanted relocalisation, to change the balance of funding and to reduce what is called the gearing problem. The House will know that, when a local authority needs to raise extra money, it cannot do so through the half that it receives in block grant from central Government, because that is fixed. It cannot raise the extra money from the quarter that it receives in business rates, because that is fixed. So the £1 on the whole budget becomes £4 on the quarter that is raised locally. In other words, the gearing problem is that 1 per cent. on the whole budget becomes 4 per cent. on the council tax.
If the council could get some of the money through the council tax and some of it through the business rates, the gearing would become not 1:4, but 1:2. In other words, marginal increases become less of a hit on council tax payers and marginal cuts become less of a benefit to council tax payers, but such matters are less acutely focused on one particular sector, and that must be right. It is another advantage of relocalising the business rates.
One argument for relocalisation is that local authorities that are depending directly on businesses for revenue have more incentive to work closely with them. History does not show that that has always been the case. Before 1990, one of the reasons why business rates were nationalised—it is funny to think of the Thatcher Government nationalising things—was the feeling that local authorities were a bit out of control in respect of what they were doing to businesses and that some of the increases were arbitrary. It was felt that increases were sometimes large and unpredictable and that, because businesses did not vote, they were a soft target. I understand such arguments and I shall return to them.
Over the 15 years since, there has been a cultural change. There is clear evidence that local authorities see it as their role to work closely with local businesses. Economic development partnerships and strategic partnerships are now much more in the warp and weft of what local government does, so there is much less anxiety that a reckless, malicious local government would fling taxes on businesses because it was easy to do so, with no regard for the consequences.
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Understandably, the business community has its reservations about allowing local authorities to set business rates without let or hindrance. One argument that is often used is that businesses do not vote, so why should local authorities be allowed to levy the tax and be in the position of taxation without representation? The fact that local authorities can tax businesses, but businesses cannot vote them out would be an argument against corporation tax. Businesses do not vote in national elections either, but we still tax them, so I am not sure that that argument stacks up. As well as being council tax payers and private citizens, the voters are employers, employees, shareholders and consumers and all have an interest in a prosperous local economy. The local electorate is not indifferent to the level of business rates, so the argument is not straightforward.
Clearly, we need to avoid arbitrary changes and huge swings. Business needs a certain amount of stability and predictability. I shall come back to the safeguards. As I agreed with the hon. Member for Brentwood and Ongar (Mr. Pickles) by implication, there would need to be an alternative sort of equalisation. For example, if Westminster City council were allowed to retain its business rates, it would be paying citizens to live here because of the amount that it would raise. Obviously that would be an absurd extreme. The City of London could be paying for world cruises. Matters are not as simple as that, but an equalisation mechanism could still allow local authorities to determine what business rate local businesses could bear and what was appropriate for the services that they have to provide because of the presence of rapidly growing businesses, and that is what I am arguing for.
The Local Government Association said that, when the national business rate system was introduced, 29 per cent. of all council spending came from business rates. Now the amount is 20 per cent., so it has fallen from just under a third to a fifth. No one is suggesting that there should be a huge shift, but that change has happened partly because of the inflation cap on business rates and partly because of huge hikes in council tax. It has meant that, within the local economy, far less is now being borne directly by business. Speaking as an economist, I say that in one sense business does not exist. It is shareholders, employees or customers. Any tax will ultimately be incident on the consumers, the employees or the shareholders. To say that so much of the tax is on business is slightly a misnomer. I hope that hon. Members understand what I mean by that.
Mr. Pickles : As he has reminded me that he was an economist, I am sure that the hon. Gentleman will consider my question easy to answer. Assuming that we accept his plan for a more modest redistribution, what additional amount would the Government have to put in to ensure that the poor parts of the United Kingdom received a sum equal to their needs?
Steve Webb : The hon. Gentleman refers to equalisation. In other words, the Government must ensure that there is not a disproportionate result from the City of Londons, the Westminsters and so on at the expense of the areas that have relatively low business rate revenue. Clearly, there is a redistributive consequence. For example, if South Gloucestershire
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authority keeps more of its business rates and ends up as a net beneficiary, someone somewhere will end up with less money. There needs to be a transitional process of getting from here to there.
The proportion of local tax paid by business has now fallen to a fifth. Many people would consider that that has not been a carefully planned, calculated, long-term strategy, but that it has just happened. It has been the year-by-year consequence of substantial above-inflation council tax rises and nominally, at least, inflation-linked business rate raises.
Mr. Drew : The hon. Gentleman has not mentioned the rural domain where there has been a careful plan to keep businesses in place by reducing business rates substantially, half through central Government and up to half through local authorities. That is vital in the sense that it is often why some businesses can stay in operation. I do not want him to lose the thought that there is a planned way in which to operate business rates, although it is a bit more confusing. It is wrong to consider that it is an urban model. We need a level of subsidy for rural businesses, otherwise they will go out of business. I am sure that the hon. Gentleman agrees.
Steve Webb : The rural post offices that have survived in my constituency have benefited from business rate relief, as have small shops. In many ways, greater local discretion on such things enables local authorities to be more responsive to precisely those sorts of local needs, instead of there being a national system.
If there was a worry that it would be unacceptable to allow councils free rein to jack up the business rates as much as they wanted—and, perhaps, to keep council tax down as a result—what sort of safeguards could we have? Various options have been considered. The balance-of-funding review came up with something. One interesting suggestion is to link council tax increases to business rates increases. That would mean that councils would not be free to jack up the business rates just because businesses do not vote, and to freeze the council tax, because any decision about increasing business rates would have a consequent effect on the electorate—albeit that increases would be more fairly shared. I am not unsympathetic to that kind of idea. I do not in general like shackling local discretion, but if there is an anxiety that history has shown that total freedom has been misused, there might be at least a transitional need for some sort of link.
There might also be some mandatory consultation process with business, although I am slightly sceptical about that, because businesses have felt in the past in respect of business rates that they went to consultation meetings and then everything went through exactly as it did before. Therefore, I am not sure how one could enforce mandatory consultation that actually changed anything.
There could be intermediate options between having a national rate, as at present, and an entirely local rate. Getting rid of the inflation cap on the national rate would help to offset the imbalance between council tax and business rates. Some element of growth money could be retained locally—I will come on to that topic shortly—or there could be a national rate for large businesses, for consistency across the country, but a variable rate for small business. Therefore, various reform options could be considered.
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What conclusion did the balance-of-funding review come to—other than that there needed to be another review, of course? One option was that local authorities might be allowed, at the margins, to keep some of the growth money; the local authority business growth incentive scheme was mentioned. I must admit that I had forgotten about that scheme until I did a bit of research. I remember sitting in the House in November 2002 and hearing the Chancellor talk about it. His pre-Budget report of that year stated that the Government intended to explore ways to build on local government reforms by allowing
"local authorities to retain some or all of any increases in business rates revenue to spend on their own priorities."
I remember sitting in the House in November 2002 and thinking, "At last we have a local government finance reform that might benefit South Gloucestershire." Little did I know! The pre-Budget report went on to say:
"Under any proposals, the additional revenue would come from increases in the tax base generated by local authorities successfully encouraging growth, and not from increasing the tax on existing business."
In other words, this scheme was not going to be about local authorities putting up taxes; it was going to be about local authorities encouraging growth and keeping some of the fruits of growth. In November 2002, I thought, "It is great that this has been announced by the Chancellor. It probably needs to be announced another four times at six-monthly intervals, but then it will happen."
Nothing happened for rather a long time. Then, the following summer, we had a consultation paper on the scheme. It came up with various criteria that the scheme should adopt. The first was to give
Occasionally, I want to add the word "sustainable" to such phrases—but that subject is, perhaps, for another day. The second was
"that the scheme should give local authorities additional revenues to spend on their own priorities".
We are all in favour of that. The next principle was
"that the incentive should be consistent with Government aims for growth in all regions of the country and reductions in the persistent gap in performance between regions".
That is an interesting principle because—to stray slightly—part of the reason why we have such growth in South Gloucestershire is the imbalance in the national economy. Personally, I think that too much growth is being forced on an already overheated area, with some of the costs that we have been talking about. Another principle is
That reference to "intelligible and transparent" is interesting.
After the consultation in the summer of 2003, another two years went by. In July 2005—more than two years later—the final details of the local authority business growth incentive scheme were produced, which I thought was great because, at last, councils were going to get to keep some of their business rate growth money. In July 2005, the Minister for Local Government
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explained how the scheme would work. The main aspects were summarised in the accompanying press release:
"Business growth will be measured in terms of the increase in a local authority's rateable value during a calendar year."
That is a reasonable way of doing that. It also said:
at the end of December 2004. Next, the press release went into local government finance mode:
That is a target; this scheme is about giving local government more discretion, and the first thing the Government do is set a target. They say that each authority will have a
the scheme. But it is not as simple as that: an authority will have a floor, which
Therefore, we have a target, a floor, a baseline and a national adjustment, despite the fact that this scheme is meant to give local authorities more control.
There is also a scaling factor:
"A scaling factor of 70 per cent. will be applied to all revenues gained above the floor to calculate the amount of revenue that can be retained locally."
However, there is a ceiling, which is
"will be based on a modified form of the Environmental, Protective and Cultural Services (EPCS) part of Formula Spending Share (FSS)."
We should remember that the criteria for that are that the scheme should be "intelligible and transparent". The press release states that that will be phased in as follows:
"The level of the ceilings for the first three years of the scheme will be 3 per cent., 6 per cent. and 9 per cent. respectively, of modified EPCS FSS."
In a sense, I do not care—if we get some money, I just do not care. The press release then goes on to mention "two-tier areas" and so forth.
The press release then includes a statement on which I would be grateful to hear the Minister's response, because I would like to know what it means for South Gloucestershire. It states:
"Authorities that fail to retain money under the scheme will be re-based, to give them a fair and meaningful challenge in the next year, and a new lower floor will be calculated, determined from their new starting point."
What does that mean for South Gloucestershire? In February 2006, the money was announced: 250 local authorities got money out of this scheme. It is precisely the sort of thing that I am talking about—growth, and local authorities keeping some of their business rates. Money was given to 250 authorities—the amount was about £100 million—but South Gloucestershire got nil. This is what I thought: how can a scheme be devised for fast-growing authorities to help them retain more of their business rates, and we get nothing?
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I have come up with Webb's law of local government finance, which is that every reform of it produces the worst possible outcome for South Gloucestershire. I have discovered since I became an MP that that is an immutable law. When the Chancellor announced the scheme in November 2002, I could not conceive of any authority in the country failing to gain—and I thought that if any authority would gain, it would be mine.
I hope that the Minister can explain what happens now. I presume that this is what has happened: we have had year after year of rapid growth, but at the moment when that was measured, our growth had decelerated. I will not call for a retrospective business growth incentive scheme, because that would go against the transparency and coherence point, but I hope that Members are beginning to see where I am coming from. We have had years of rapid growth, with its associated costs, and yet the system has not reflected that. Now that South Gloucestershire has not qualified under this year's scheme, will it be easier for it to qualify next year—or not? I do not understand whether that will be the case.
I query the scheme—and that is not only because we did not get any money out of it. It feels like a classic case of people saying, "We've got the balance-of-funding review, and then we've got another review—the Lyons inquiry—so we can't make any decisions about anything, so we will just fiddle around the edge." This has all the hallmarks of the Chancellor having created yet another fiendishly complex scheme that has a whole set of bureaucracy—administration, central targets and so forth, which will no doubt need to be abolished once we have some sort of relocalisation—and I think that the philosophy behind it is very peculiar. What is it saying exactly? Is it saying that local authorities should grant more planning permissions for new businesses, so that they get to keep some of the business rates? That would be a strange incentive mechanism. I am not entirely sure what authorities are meant to do that they are not already doing. Local authorities promote local enterprise; what additional things are they supposed to do to try to generate extra money? What is the incentive mechanism? What is the scheme trying to incentivise? I am not clear on that.
Mr. Drew : Does the hon. Gentleman agree that one way to cut through a lot of the problems would be to do what we are starting to do with housing development—although the Government have been taken there kicking and screaming—which is to consider an element of land value taxation? It should be put formally on the table that what is wrong with this country is that we have never taxed land fairly and effectively. That is as true for business as for housing development. The Government are on to something in considering a planning gain supplement, although they have not gone all the way. Does the hon. Gentleman agree that the Government could do the same for business rates—that is, sweep them away and consider proper land value taxation?
Steve Webb : I know that the hon. Gentleman is a close follower of Liberal Democrat policy and manifestos. I have been incredibly restrained in not mentioning site value rating, but I feel that this is the moment to do so. If I were talking about a more wholesale reform of business rates, we would certainly advocate looking into the taxation of site values; but that is in the medium
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term. My priority, as the hon. Gentleman will gather, is to try to do something more immediate about the real financial crisis faced by local authorities—well, by my local authority.
So, is it just me? Are we talking about special pleading from one local authority? Actually, we are not: paragraph 160 of a 2003–04 report by the all-party Select Committee on the Office of the Deputy Prime Minister says, in the context of relocalising business rates, that
"The Committee therefore recommends that the Government returns business rates to local authority control as soon as possible, but no later than 1 April 2006."
I know that the Department likes to follow the Select Committee's recommendations, so it has a busy month ahead if it is to meet that deadline.
We are not just talking about the special pleading of one local authority; the issue is bigger than that. It is about the balance of funding between central and local government, which has got out of kilter. An all-party Committee, representing all parts of the country, thought that that would be the right structural change. It so happens that, in my judgment, such a change would benefit my area, but there are also good conceptual arguments for it.
So where are we now? The Lyons review considered the same issues once again and, funnily enough, came up with many of the same answers as the previous review. Interestingly, Sir Michael Lyons said that not all businesses opposed the relocalisation of business rates. There are two reasons why some businesses actually supported it. First, some of them wanted local discretion for funding transport, road improvements and regeneration; I did not mention regeneration because it is not a particularly big issue in my area, but clearly it is in some parts of the country. Secondly, there is a feeling among businesses that links with local authorities have weakened since business rates became national, because there is no need for that dialogue, and that has tended to undermine those relationships. But still we are waiting.
In conclusion—I hope that I have not deprived anyone of the chance of contributing to the debate—if someone came to the issue cold, they might think, "Don't be ridiculous; you're talking about a prosperous area. It has plenty of money, and people there don't have any problems. Just leave it alone", but if they looked at the matter in a bit more detail, they would realise that things are not that simple. They would realise that jobs and prosperity are great, but come with an infrastructure cost that is not being met, and that every additional person who moves into South Gloucestershire is a net drain on its exchequer. That is a strange situation: the Government are setting up an incentive scheme to encourage local authorities to generate business growth, yet when the local authority gets business growth, it loses money. That cannot be right.
Sorting out South Gloucestershire's problem will be part of a bigger structural reform that, as the Select Committee said, has its own justifications. We should make the balance of funding more even, so it is not three quarters to one quarter, but half and half; that would be
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much better. We should try to have a system whereby local communities, and council tax payers who also wear other hats as employers, employees and customers of local businesses, can decide on the right balance for themselves. That has to be right. For too long, under successive Governments, there has been a drift towards central Government telling local government what to do. We should relocalise business rates, with appropriate adjustments for the imbalance of business rate revenue, but should then allow local authorities to change rates at the margin to reflect local priorities.
Perhaps I have made the odd comment that was not wholly appreciative of some Government schemes, so I will end on a note of consensus. All three parties represented here today are apparently in favour of localism. I am reliably informed that the new Conservative leader believes in localism. I do not know whether that is in the pamphlet that he is sending to Conservative party members, but most good things are, as far as I can see. I hope that he is in favour. The Government are the new localisers, I am told, and we are localisers, too, so there is every chance of all-party agreement on the issues that I raised. I hope to go back to south Gloucestershire at the end of the week with that £11 million to give back to the local community.
10.16 am
Mark Hunter (Cheadle) (LD): I start by congratulating my hon. Friend the Member for Northavon (Steve Webb) on raising the subject today and on securing this debate, but I caution him against making too many security arrangements for taking a cheque back with him at the end of the week. One always feels optimism about such matters, but it may be slightly too optimistic to hope that the Government will turn the matter around in that space of time.
It is clear that the issue is of great importance to the community in South Gloucestershire, and the sentiments expressed by my hon. Friend are shared by businesses, residents and councils the length and breadth of the country. It is widely accepted that the overall system of local government finance is somewhat discredited, to say the least. After all, if there was no fundamental problem with the system, the Government would not have set up the wide-ranging Lyons review, and it would not have taken so long for that review to report to Parliament. Our debate has highlighted one of the key reasons why the system is in crisis: the lack of control and accountability for the financing of local services.
The fact that local communities and their elected representatives do not determine their own fate when it comes to funding for local services is a major factor in the public's lack of confidence in local democracy as a whole, and business rates are a shining example of the kind of centralism that stifles much local decision-making. It always seemed strange to me, in the three years when I served as council leader in Stockport, that we were obliged—by law, I believe—to consult the business community when formulating annual budgets, yet whatever was said, and however much the council listened, we could alter neither the rate nor the total amount that we raised from it. That was one of the more bizarre aspects of an already strange system.
There are a number of arguments for retaining the status quo—frankly, there always are—but I have not seen any compelling evidence that shows conclusively
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that businesses would move out of high-rate areas into lower-rate ones. That did not happen when the rates were localised, and I do not believe that it would happen now. Neither do I believe that councils are itching to increase local taxation. In fact, according to the Audit Commission, the steep increases in council tax since 1997 have largely been caused by the gearing and the central control of the system that we are debating. The attitude seems to be that Government believe that local matters are best dealt with from an office in Whitehall, and that denigrates our democratic system.
I find it patronising, at best, to be told that democratically elected representatives are somehow unworthy of, or not to be trusted with, tax-raising powers. As my hon. Friend the Member for Northavon said, local government—I am sure that the Minister will agree—has moved on since the days when Militant Tendency occupied Liverpool city hall, and when councillors might be tempted to let rip with such powers. These days there is a much more professional and—dare I say it?—business-like approach in town halls throughout the country, where local authorities, including the Liberal Democrat one in Liverpool, work closely and constructively with their partners in the commercial sector. Anyway, as we all know, this Government are not afraid to cap.
A new system of localised business rates could not be implemented overnight. Transitional arrangements could be put in place to offer assurances to businesses. For example, we could start by localising only part of the rate, with the other part remaining linked to inflation, or maintain the national system for large businesses at least in the short term.
Businesses are an integral part of their community and it would be doing a disservice to local representatives to suggest that they would abuse any powers in this area. Businesses would then have a much greater stake in their local authority. Safeguards can be applied to the system, by linking business rate levels to council tax increases, for example, if that is required, once the two systems have converged. By localising rates in this way, we would be restoring accountability to the system and encouraging responsibility.
The fact is that my party is asking not for more but for fairer taxation. Recent trends mean that the burden of local authority finance has been shifting away from businesses to council tax payers, and it falls disproportionately on those in our community who are least equipped to pay it. It is not just that businesses in South Gloucestershire are being ripped off; what really rankles is the fact that pensioners and people on low and fixed incomes are paying for that.
Mr. Pickles : I am sorry to say that I am not entirely following the hon. Gentleman's argument. Although he was saying that his party was not looking to increase taxation, the hon. Member for Northavon has just said, very bravely, that an additional sum would have to be added to the pot to take care of equalisation. That has to come from somewhere and it is obvious that it is coming
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from the Government. Is the hon. Gentleman perhaps not entirely right when he suggests that he is not looking to increase taxation?
Mark Hunter : I thank the hon. Member for Brentwood and Ongar (Mr. Pickles) for his intervention, but my hon. Friend the Member for Northavon has already indicated that these issues can be dealt with via the equalisation mechanism, which would be necessary. In any event, if the point of what I am trying to put across today is not clear by the end of my remarks, I should be happy to converse further with the hon. Gentleman.
It rankles with us that people on low and fixed incomes are paying for all this. On a very limited scale, raising money from businesses at a local level, through business improvement districts, has proved successful and I do not see why those successes cannot be repeated more widely.
There is a risk involved in changing a policy like this, but I believe the Government should be bold in handing powers back to local authorities. We have heard plenty of rhetoric from Ministers about the localism agenda and empowering communities, but that is about as far as it has gone. Local government has seen creeping centralisation for far too long and, as a result of that centralisation and the gearing effect, council tax for the vast majority of people is spiralling.
I hope that when Lyons finally reports, he will take on board views like the ones expressed by my hon. Friend the Member for Northavon this morning, because after all, one of his key tasks is to restore confidence in the system of local government finance, and reallocating business rates to local councils would be an excellent place to start.
10.23 am
Mr. Eric Pickles (Brentwood and Ongar) (Con): Mrs. Humble, this is the first time that I have served under your chairmanship. It is always slightly unnerving to discover a member of one's own intake in such an august position, but I shall do my best to keep my side up.
It is a great pleasure to follow the hon. Member for Northavon (Steve Webb). I spent part of my life listening to his dissertations in various Committees. I had not realised, until now, how much I missed his input and I am pleased to have this additional fix. It is a pleasure to listen to the hon. Member for Cheadle (Mark Hunter). I commend his criticism and his urging the Government to be bold in returning powers to local authorities.
One of the highlights of my recess was listening to the Today programme, when the Minister of Communities and Local Government introduced double devolution. It was immensely interesting to hear that, as he moved from Today to The World at One and PM, the right hon. Gentleman was faced with the same question—"Which powers are the Government proposing to devolve to local authorities?"—which touches on local government finance and the business rate. I did not have the opportunity to listen to The World Tonight, but by the end of PM, he was not capable of giving a single example. I suppose that if one is in charge of such immense powers, it is sometimes difficult to let go.
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I thought that the hon. Member for Northavon was courageous—so much so that I am sure his statements will appear in numerous copies of In Touch—when talking about redistribution under his proposals. At one point, I thought that he was suggesting that an additional sum of money was to be put in the pot by the Government to take care of the equalisation problem. However, the hon. Member for Cheadle assured me that that was not the case, so it must be the reverse; we must be dealing with a set sum.
The hon. Gentleman talked about transitional relief, which must mean that net recipients will receive less and there will, perhaps, need to be a cushioning effect—perhaps a floor—which he criticised so regularly in relation to additional economic growth. There must be a floor, which means that over a period of years the poorer parts of the country will receive less financial help. That is a brave statement, particularly when—I am looking at the Under-Secretary of State, Office of the Deputy Prime Minister—the hon. Gentleman seems to be targeting Labour seats. The red rose may be featuring in this particular thing. Nevertheless, the hon. Gentleman is a great man, and if we can get his words around the nation, so much the better.
I return for a moment to what the hon. Gentleman was saying with regard to local authorities being the beneficiaries of new business. He was right to say that the comprehensive performance assessment form is a little bit complex and is difficult to fill in, but he has to understand that there is a problem of management that does not just relate to new economic growth, which is almost exactly mirrored in the CPA regime. South Gloucestershire has almost certainly lost out where a number of authorities lose out: it is impossible in the forms to put the information in any kind of context.
The hon. Member for Northavon talks about his local authority having a process of growth, which has not been taken into account when it arrives at a particular point. One often sees that in the CPA forms, because one cannot work out precisely where an authority has come from in order to give the appropriate rating. That can be done within the form to assess the economic growth; however, although the direction of travel can be worked out, the speed cannot. If South Gloucestershire is given another base, it would probably take three or four times before that captures what is happening, by which time the process would have moved on again. There is a legitimate criticism to be made in respect of that.
The hon. Members for Cheadle and for Northavon were a bit sniffy about the business rates consultation. I am old enough to remember the old system. I participated in the last rates consultation when business rates were localised, and I participated in the first one thereafter. In the last one, everyone demanded a lower increase in the business rate and in the next one they demanded a higher increase in the domestic rates. It was an interesting experience.
I think that what divides the good authorities from the bad is whether they treat the rates consultation meeting as a straightforward decision about how much to put up the council tax. The good ones treat it almost like a "state of the nation"; they try to work closely with their business communities, they lay out their plans and the ways in which they want to take the authority forward and consider ways of helping local business. As the hon. Members for Northavon and for Cheadle said,
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no serious local authority can expect to be able to offer prosperity to its citizens unless it works closely with the business community.
I was kind of interested—or rather, I was beyond interested; I was fascinated beyond belief—by the lack of commitment to site value rating. It took a prompting from the hon. Member for Stroud (Mr. Drew) to elicit from the hon. Member for Northavon some general support for site value rating. I think it would be fair to say that unless the balance of funding is properly addressed, any problems in our current financial system will almost certainly be exaggerated. Firms in an area where land values are higher, such as local high streets, will end up with much larger tax bills, which will put many firms out of business and encourage new development on cheaper greenfield sites. I see the Minister nodding. It will also mean that two pieces of land of the same size in the same area will be taxed equally, irrespective of the use to which they are put. So, for example, a garage development would pay the same as a next-door office block of the same floor size. That does not strike me as terribly sensible.
I must commend to the House the comments of the Liberal Democrat housing spokesman in 2002—I have had a temporary lapse and cannot remember his constituency—who said:
and that it would be a tax on regeneration and development. That does not strike me as a terribly good thing. He added:
"Such a tax would also end windfall gains to which people contribute nothing."—[Official Report, Westminster Hall, 24 July 2002; Vol. 389, c. 277WH.]
I am not entirely sure that that is an avenue that I want to go down, because I do not particularly want to tax regeneration and redevelopment.
Steve Webb : I think that it was my hon. Friend the Member for Torbay (Mr. Sanders) that the hon. Gentleman was referring to.
Steve Webb : The hon. Gentleman wanted to spoil the denouement of my thriller, and I want to do the same to his: will he, at the end of his speech, say that he is for or against the re-localisation of business rates?
Mr. Pickles : I have decided now that, as in a great movie, there is an arc: a first part, a middle, and a final section. I am still towards the middle, but to keep everyone on their toes, I shall say that towards the end I shall make an announcement.
The hon. Member for Northavon mentioned being a little uncertain about why the amount collected in business rates had gone up. No doubt he was very clear in his mind about the Government's undertaking, in statements to Parliament, that the business rates would be revenue-neutral. That clearly has not been the case, as the hon. Gentleman, I think, hinted. There has been a 7.4 per cent. increase in real terms, in the process of revaluation of the business rate. The hon. Gentleman is right to suggest that that is quite an important part of business expenditure. In fact, the business rate is the third largest sum that a local business must put out, after
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wages and rent. It is to be regretted that such a rapid change—particularly in areas that have enjoyed considerable economic growth since the last revaluation—was not cushioned with a subsidy from central Government, as has been normal. Business rates have been higher this year for medium and large firms.
We spoke a while ago about complexity with reference to councils' ability to adjust and claim for additional economic growth. All those problems have been mirrored in the low take-up of small business relief; it is suggested that local firms are losing out on half of that. As a result, to finance the transitional relief, the Government have capped the reductions in bills on properties where revalued rateable values have fallen. That is the so-called downward phasing. The Royal Institution of Chartered Surveyors has said that some firms will be paying almost 50 per cent. more than their true liability and that
"it is absurd that those whose businesses have suffered and whose rates bills should be reducing, find they have to pay a financial penalty to protect what are usually the more successful businesses from increases in rates bills."
It is a shame that the small business relief is not automatic. Firms must fill in forms to claim it, discouraging take-up, but the largest multiplier will still automatically be levied on medium and large firms, irrespective of the take-up of small firms. Like the means-testing of benefits, on which the hon. Member for Northavon is a considerable expert, the paperwork will discourage many small businesses from applying. The Government figures reveal that almost half of all small businesses have not anticipated the relief.
We are now moving into the final phase of the arc that I described. I can understand why all this fuss was created. I look back to the time when I was a council leader. There were firms in local authority areas not far from the one that I represented—Bradford—where firms were so desperate, because of the penal nature of the taxation, that they went to the extraordinary length of removing roofs from factories to avoid it. If that had happened in an authority on which I was a representative, I should have found it deeply shaming.
There was a feeling that the business rates could be squeezed until the pips squeaked. That proved not to be so.I have always felt that the recession that we faced in the steel and textile towns of the north of England was made quicker and deeper by what happened. It was not the cause, because things were going against a trend, but there comes a time when people ask, "Shall we try and go on for a little longer, in case there is an upturn?" and decisions are taken. However, that is ancient history. I do not think that there are many authorities in the country, regardless of political control, that would even contemplate that. We have seen the effects and they are not particularly pretty.
My party is considering these matters, and I have an official statement to make on its behalf. It is the kind of thing that one reads on the way home, thinking, "This will go down quite well":
"Conservatives would not necessarily oppose schemes that will give local councils a direct financial incentive to boost economic activity in the area but would avoid higher taxation."
By Jove, I cannot believe it—whoever wrote that must have a bonus! However, it says nothing. My party is considering the issue, but speaking as an individual, not as a spokesman for my great and glorious party, I think that the day when we repatriate business rates cannot come soon enough. Indeed, there are good and solid economic reasons for repatriating them, but I am not entirely sure that I want to go down the line suggested by the hon. Member for Northavon, because I do not really want to rob the poor.
Before we can make a final decision on this hard issue, we must be clear in our minds about the effect that the balance of funding has on the multiplier. The biggest issue—whether we are talking about business rates, local income tax or council tax—is always resource equalisation. We clearly cannot have the poorest part of the country being starved of resources and the richest part retaining everything, although, in truth, I cannot imagine any political party allowing that to happen, because down that route would lie madness.
So, the short answer, as we dip towards the end of the arc of the great novel of business rates, is that my party is, as hon. Members can imagine, looking at the issue quite closely. It is one of the great issues on which we all, regardless of party, must make a decision. Although my party is not, at the moment, opposed to returning business rates, it is not saying yes. On the other hand, I am saying yes.
10.42 am
The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Jim Fitzpatrick) : Mrs. Humble, it is a pleasure to see you in the Chair, and I associate myself with the ever-courteous remarks of the hon. Member for Brentwood and Ongar (Mr. Pickles) in that regard. I congratulate the hon. Member for Northavon (Steve Webb) on securing the debate and particularly on his success in persuading so many colleagues to stay away and allow him the opportunity fully to develop his position and his argument. The debate provides a useful opportunity to discuss the allocation of business rates generally and in the 2006–07 and 2007–08 settlements.
The hon. Member for Northavon is particularly concerned that local authorities are unable to keep the business rates that they collect, and I sense that the debate is part of the campaign that he has mounted to return business rates to local authorities, among his other objectives. It was interesting that, speaking for himself, the hon. Member for Brentwood and Ongar agreed with the hon. Member for Northavon, but that he did not quite agree with him when he spoke for the Conservative party. That was quite an interesting balancing act.
I shall try to outline the Government's position and their view of the status quo, as well as respond to several of the points that have been raised and set out the way forward. However, in contrast to the hon. Members for Northavon and for Brentwood and Ongar, my conclusion will be no surprise when I arrive at it in a few minutes' time.
In 2006–07, for the first time, we have announced two-year grant allocations for every local authority in England. We have put a premium on the stability and predictability of funding, so that councils can plan
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ahead for better service delivery. The first full three-year settlement will be introduced alongside the next spending round. In the interests of further stability, we have made grant floors a permanent part of the grant distribution system. Floors guarantee a minimum year-on-year grant increase for all authorities.
South Gloucestershire has benefited from the extra money that we have invested in local services in recent years. For the 10-year period to 2007–08, we have been able to provide South Gloucestershire district council with an average annual increase in general grant of 5.7 per cent. in cash terms.
The business rates system makes a significant contribution to the funding of local authorities. However, as far as local authorities are concerned, there is no correlation between the business rate that is collected in their areas and the business rate that is allocated to them. In fact, most authorities are net gainers, benefiting from the large business rate contribution from the City of London, Westminster and some other large authorities, as the hon. Member for Northavon acknowledged
Business rates help support all tiers of local government in an area. For the South Gloucestershire area, that means that business rates are provided for South Gloucestershire district council, Avon fire and rescue authority and the Avon and Somerset police authority.
Before 2006–07, business rates were distributed to authorities on a pound-per-head basis. From 2006–07, they will be distributed under the same formula as revenue support grant.
It is important to consider not just the distribution of the redistributed business rates but revenue support grant and principal formula police grant. We refer to those three elements collectively as formula grant. From 2006–07, the Government have introduced a new system to distribute formula grant. Under that system, the distribution of formula grant is determined wholly by four elements: relative needs amount, the relative resource amount, the central allocation—an amount per head—and the floor damping scheme.
The relative needs and resource elements should be broadly familiar to hon. Members because the system has long contained formulaic estimates of relative need and relative ability to raise council tax. The central allocation makes explicit what was always implicit in the system—that after taking account of differences in relative needs and resources, some grant is allocated on a per-capita basis. Finally, to ensure that each authority gets a reasonable increase in grant, the Government set a guaranteed minimum percentage increase in grant each year—the floor. The cost of that is met by scaling back grant increases above the floor.
Once we have worked out an authority's allocation of formula grant, we need to work out how much of each of the elements that make up formula grant an authority receives. We do that as follows. First, we subtract the amount of principal formula police grant, if any, that an authority receives from its formula grant. We then split the remainder into revenue support grant and redistributed business rates, in proportion to the England totals of those elements.
As I explained, every local authority receives a proportion of the redistributed business rates. So in the South Gloucestershire area, the result of all those
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calculations is that the district council will receive £41.016 million in redistributed business rates in 2006–07, Avon fire and rescue authority will receive £19.904 million and Avon and Somerset police authority will receive £52.761 million.
Steve Webb : I am grateful to the Minister and I am following the detail closely, but will he consider the sentence that he has just said? He said that South Gloucestershire would get £41 million back from the business rates, but South Gloucestershire businesses paid £92 million in business rates this year. I have been talking about a gap of £10 million or £11 million hitherto. Is the Minister saying that, from next year, because the reallocation is done on a different basis, there will be a huge gap between the local business rates that are paid and received back?
Jim Fitzpatrick : I shall discuss what is going to happen when I seek to clarify the issue of the local authority business growth incentive, which the hon. Gentleman mentioned.
I was going to say that the hon. Gentleman had based much of his speech on the amount of business rates collected by South Gloucestershire and the amount of redistributed business rates that it received. However, I was also going to say that, if we look at the figures for 2004–05, we see that whereas South Gloucestershire businesses contributed just over £84 million to the pool, South Gloucestershire received £68.796 million in redistributed business grants. As the hon. Gentleman says, there was a differential, but South Gloucestershire residents also benefited from the amount of business rates provided for the fire and rescue and the police authority that cover their area. Avon fire and rescue authority received more than £9 million and Avon and Somerset police authority received more than £20 million. It is therefore true that South Gloucestershire is a net contributor of business rates to the pool, but the amount is perhaps not as much as hon. Members may have been led to believe.
The hon. Member for Northavon described the local authority business growth incentive scheme very accurately and fully. The first grants, totalling £110 million, have been paid to authorities in 2005–06. As he said, South Gloucestershire received no grant under the scheme in that period. An evaluation of the first year of the scheme is under way and will determine what changes could be made to improve the scheme's effectiveness. At this time, therefore, there is no precise answer to the hon. Gentleman's question.
It is right that local businesses should contribute to the funding of local authorities. It is also right that we should use the grant in the settlement, including redistributed business rates, to ensure that all councils are able to set realistic council tax increases. The most important factor in that is the stability and predictability of Government grant. As I have said previously, we ensure that every authority receives at a least a minimum percentage increase above the previous year's formula grant, after adjusting for changes in funding and function.
Under the Conservative Government, if the calculation of an authority's grant was below the level of the previous years, that authority had to live with it.
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Since 1999–2000, the Government have ensured that every local authority receives at least the same amount of grant as the previous year, on a like-for-like basis. This year we have also provided authorities with grant allocations for two years. That means that they can take both year's grant settlements into account for their medium-term planning.
I started by saying that the issue was complicated. As the hon. Gentleman will appreciate, we have been considering the local government financing system for some time. The arguments that he has put forward in favour of a re-localisation of business grants are not new. In 2004, the balance-of-funding review acknowledged that re-localisation of business rates could give councils greater incentives to promote economic development and improve links with businesses. However, it also noted that businesses had serious concerns, including risks to productivity and competitiveness. They argued that the proposal would be likely to harm relationships between business and local government. The report noted that re-localisation of business rates was not an easy option and that further work would be required.
Following that review, the Government established an independent inquiry under Sir Michael Lyons to consider the case for changes to the system of local government funding, and to report and make recommendations by the end of 2005. As part of that inquiry, he was asked to assess the case for giving local authorities more flexibility to raise additional revenue, and to analyse options for shifting the balance of funding, including, among others, the reform of business rates.
In September 2005, the Government agreed with Sir Michael to extend his inquiry so that it could consider issues relating to the wider functions of local government and its future role, as well as, and prior to, making recommendations on local government funding. Sir Michael will produce his final report at the end of 2006, which will contribute to the comprehensive spending review of 2007.
The extension to Sir Michael's inquiry will enable us to make well-informed decisions on local government finance. We believe that we should make changes to local government funding only when we have a clear and complete understanding of what we want local government to do. That understanding must be shared not only by central and local government but by all those who help to deliver services and, most important, by the people whom they serve—the general public. In short, we must settle function before funding.
Some of the arguments regarding business rates have been helpfully set out in Sir Michael's interim report and consultation paper, which was published on 15 December 2005. The Government welcome that publication as a useful contribution to the debate on the future role and function of local government and the way it is funded; however, it is an interim report, not a final one. Sir Michael has not come to firm conclusions, but has set out some of his thinking to date and begun an important process of consultation on the role and function of local government.
In his interim report, Sir Michael sets out a number of the arguments that have been made to him about whether local authorities should have a role in the
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setting of business rates and whether business rates should be re-localised. He notes that arguments have been made previously, not least to the balance-of-funding review, which the hon. Gentleman mentioned, about the contribution that the re-localisation of business rates could make to changing the balance of funding. Local government has supported that position for some time, although as Sir Michael notes, it too recognises that business rates play an important role in the equalisation system for supporting services across the country. As such, they could not be wholly retained locally without significant other reforms.
Sir Michael also notes that there are arguments against re-localisation, as evidenced by the representations from, among others, the CBI and the British Chambers of Commerce. They have expressed concern that local control of business rates would make tax bills less predictable and could lead to an increase in the taxes paid by business. It is clear from Sir Michael's interim report that there is a range of views on the subject. Sir Michael confirms that he
"will continue to explore the interactions between business and local government in many of the areas my remit covers. This will include further consideration of how changes to business rates could improve the ability of, and incentives on, local authorities to support and promote economic development, including looking at current exemptions and discounts."
We have always made it clear that there are difficult decisions to be taken on local government funding. That is why it is important to take the time to get them right. Any substantial reform has to be set firmly within the wider context of a clear, shared understanding of the role of local government. We will make no decisions on the re-localisation of business rates or on any funding issues within Sir Michael's remit until we have received and considered his final report, which is due at the end of this year.
With the extension of Sir Michael's remit, there is now an opportunity to promote a greater understanding of local government among the public. We encourage all concerned to contribute to the next phase of Sir Michael's inquiry so that he can offer the best possible advice in his final report. In this way, we are confident that Sir Michael's work will provide the platform for fundamental and lasting reform.
This debate is an example of the interest in the funding of local government, and I am grateful for the opportunity that it has provided to hon. Members to air their views, including, so extensively, the hon. Member for Northavon. Sir Michael is also keen to see a wide-ranging debate on the issues relating to his inquiry. I encourage hon. Members to ensure that he is made aware of their views so that he can take them into account.
Finally, I agree with the hon. Member for Cheadle (Mark Hunter) that, sadly, there will not be a cheque in the post before Friday. However, Sir Michael will bring forward proposals in due course that I hope will command general support.
10.56 am
Sitting suspended until Eleven o'clock.
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